Monthly Archives: August 2009

China’s stock market, measured by the Shanghai Composite Index, fell 19.7% from August 4 to August 19—narrowly avoiding the 20% decline often referred to as the threshold for a bear market. After climbing more than 100% during the nine months since the low on November 4, 2008, a 20% pullback is not all that alarming or surprising, and the index regained one quarter of the decline late last week as it rebounded off of a key technicallevel. However, the volatility in the Chinese stock market raises a question about the potential volatility in the underlying Chinese Economy after an explosive 16% GDP growth rate in the second quarter and the resulting impact of a potential Chinese economic slowdown on emerging market stocks and commodity prices.

U.S. equity markets all but shrugged off a relatively weak run of economic data last week, finishing down slightly. The Federal Reserve weighed in as well last week, signaling that it was planning to end its Treasury purchase program in October. Otherwise, the statement from the Federal Open Market Committee (FOMC), the Fed’s policy making arm, provided few clues as to how (or when) the Fed will begin to remove the policy stimulus it has put into place over the past 18 months or so. This debate will likely dominate the investing landscape over the next six to nine months.

On balance, last week’s economic data came in on the weaker side of expectations, that has been the exception, not the rule lately. Prior to last week, roughly two-thirds of the economic data released over the last two or three months has come in above expectations. The weaker – than expected data released last week doesnt change our view that the recession ended in late Q2 2009 or early Q3 2009 and that a recovery is now underway. The market is still debating the pace, shape, and sustainability of the recovery.

We continue to expect below average, but positive, economic growth in the second half of 2009 extending into 2010. Yet we expect a powerful 20-25% year-over-year rebound in profi ts beginning in the fourth quarter. How can it be that a small rebound in GDP can result in a big rebound in earnings per share (EPS) for S&P 500 companies?

Unfortunately, investors often misunderstand the relationship between GDP and the stock market. There is no statistical relationship between the performance of stocks and GDP growth in a quarter. The correlation—or degree to which two things move together—between GDP and the S&P 500 index is zero. Don’t believe me? See for yourself. As you can see in Chart 1, there is no discernable pattern. Notably, over the past 31 years if GDP was negative the stock market was up or down during that quarter exactly 50% of the time.

The release of the July jobs report capped off a very good week for the U.S. economy, as financial markets continue to price in recovery in the second half of 2009 (2H) and beyond. This week, markets will endure another heavy dose of economic data for June, July and early August, and react to the Federal Reserve’s latest Federal Open Market Committee (FOMC) meeting, which concludes on Wednesday, August 12. Although there were a few disappointing data points last week—including the ADP employment report for July and the Institute for Supply Management’s report on the service sector in July—on balance, the vast majority of the data released last week reaffi rms our long held view that the U.S. economy remains on track to post positive GDP growth in Q3 and Q4 2009.

The old adage that the market climbs a wall of worry is rooted in historical evidence. History shows us that the prevailing climate during powerful rallies is most often one where conditions are still negative and the majority of investors are bearish and pessimistic. The stock and corporate bond markets have been climbing a wall of worry since early March.

On Friday, the Bureau of Labor Statistics reported that the United States lost a net 247,000 jobs during the month of July and registered a 9.4% unemployment rate. the stock market, measured by the S&P 500 index, rallied 1% to a new high for the year, bringing the rally total to a 50% gain since the low on March 9. The employment report was the best reading on job losses since before Lehman Brothers failed in September of last year – the event that precipitated the peak of the financial crisis.

We are starting to see some parts of our economy begin to heal from the big bank meltdown that started last fall. And after severe declines in U.S. GDP in the fourth quarter of last year and the first quarter of this year, the second quarter report shows a modest 1% drop in real GDP. However, many areas remain weak—consumer spending, business investment, residential construction and inventory investment were all down, while net exports (due to huge declines in imports) and government spending were up.

Last week’s economic calendar was chock full of data, and the data continued to confirm that the most severe economic downturn since the Great Depression was on the cusp of ending as Q2 2009 ended and Q3 2009 began. This week, it’s another busy week for data, dominated by the employment data for July due out at the end of the week. As was the case last week, this week’s data set will allow market participants to continue to assess the exact timing, and more importantly, the pace, composition and sustainability of the economic recovery.

Although the U.S. economy contracted by 1.0% in Q2 2009 versus Q1 2009, the pace of decline was much less severe than in prior quarters. Inventory destocking accounted for most of the decline in GDP in Q2. Outside the massive drawdown in inventories, the economy only contracted by 0.2% in…

Stocks built on the rally with another net gain last week, ending the week with the S&P 500 Index up 46% from this year’s low point. In fact, July was the best month for the Dow Jones Industrial Average since October 2002—the end of the last bear market. On Thursday, the S&P 500 index came just a few points shy of 1,000 during the day—the highest level on the index since November of last year. On Friday, second quarter GDP was reported to have been down just 1%, compared to the 5-6% declines in the prior two quarters, showing us that the recession has faded quickly and a recovery in the economy is now at hand. .

Market participants were pricing in another Great Depression early this year as stocks fell an additional 25% from the start of the year to the low point on March 9. Then stocks rallied nearly 40% over the two months following the low point as the markets began to reflect expectations of a mere recession rather than a depression…

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